Minimum standards for
covered bonds
1. The bond is issued by – or bondholders otherwise have full recourse to – a credit institution which is subject to public supervision and regulation (e.g. a banking licence requiring compliance with standards on credit, liquidity and other financial and operational risks).
2. Bondholders have a claim against a cover pool of financial assets in priority to the unsecured creditors of the credit institution.
3. The credit institution has an ongoing obligation to maintain assets of a specified total value, each of a specified quality in the cover pool to satisfy the claims of covered bondholders at all times. It is typically required that the book value (after credit provisions) of the assets exceeds the notional value of the bonds (overcollateralization).
4. The obligations of the credit institution in respect of the cover pool are supervised by public or other independent bodies.
This typically requires:
• a cover pool monitor
• periodic assessment of the cover pool by the cover pool monitor
• ongoing management and maintenance of the cover pool upon the credit institution’s insolvency to ensure the timely payment of covered bondholders